Speaker 1: Welcome to the Bloomberg Penl Podcast. I'm Paul swing you.
Speaker 1: Along with my co host Lisa Brahma Wicks. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Well, in days like today, when
Speaker 1: you have a big sell off in the equity markets,
Speaker 1: it's good to speak to a season grizzled veteran, and
Speaker 1: we have that in Hugh Johnson, Chairman and chief investment
Speaker 1: officer of Hugh Johnson Associates with about a billion and
Speaker 1: a half dollars under management. Hugh, it's great to chat
Speaker 1: with you today. Help us just to put what we're
Speaker 1: seeing today on the tape into some context for us. Well,
Speaker 1: first of all, nobody knows, including myself, what's going to
Speaker 1: be the outcome out comfort the economy of China, the
Speaker 1: economy of the US, and of course the financial markets.
Speaker 1: We have some things that can reasonably serve as as
Speaker 1: a guide. We of course had the stars epidemic or
Speaker 1: problem that we had in two thousands three. In two
Speaker 1: thousand fourteen, we had a bowl of notes. We've had
Speaker 1: this kind of thing before, and it's told us to
Speaker 1: kind of, you know, don't get caught up in the panic.
Speaker 1: I think that's always a mistake. So I think, don't
Speaker 1: get caught up in the panic. Maybe step back from
Speaker 1: what's going on and let them dost settle or let
Speaker 1: the markets settle down before you start making any investment decisions.
Speaker 1: There is a somewhat bright side of this, if you
Speaker 1: can see anything bright in this, and that is we've
Speaker 1: gone from a level at least as I do the
Speaker 1: numbers of being meaningfully overvalued, to being let's say a
Speaker 1: little bit overvalued but not as much overvalued. In other words,
Speaker 1: this could have an opportunity, but it's it's not here yet.
Speaker 1: So the main thing is don't get caught up in it,
Speaker 1: and don't panic. It's not here yet. When do you
Speaker 1: decide to buy the dip? That's really a good question.
Speaker 1: I I think you buy the dip when the valuations
Speaker 1: look a little bit better. You know, we started the
Speaker 1: day to put some numbers on a Lisa. As I
Speaker 1: do the numbers five percent overvalued or above the level
Speaker 1: we should average in the current quarter. You know, this
Speaker 1: is kind of fun with numbers. We've come down to
Speaker 1: where we're still a little bit over value three point
Speaker 1: six percent. Um I think you wait a couple more days.
Speaker 1: If we got down to our level of say even
Speaker 1: being fairly valued or one percent one percent overvalued, I
Speaker 1: start to buy, start to buy, maybe buy some some things.
Speaker 1: Keep in mind, little just just how much further do
Speaker 1: we have to go to get to that point? Well,
Speaker 1: you know, and as I say, you've got to go
Speaker 1: down another three three to five percent in my view,
Speaker 1: three to five in in the either you can measure
Speaker 1: it by the SMP or the down. If you went
Speaker 1: down that much, I think then you could probably start
Speaker 1: to start to buy. Well, what are some areas that
Speaker 1: you would be buying? Uh, you know, when this market
Speaker 1: does set it out, or if we do get that pullback,
Speaker 1: you're suggesting, well, that's great, that that's a great question.
Speaker 1: Because um, I haven't been very constructive or positive on
Speaker 1: the markets. I've been saying, you know, the markets are
Speaker 1: not going to have a particularly good year, especially after
Speaker 1: what we had in two thousand and nineteen. So I've
Speaker 1: been trying to tell investors of what we've been doing
Speaker 1: is to add a little defense to portfolios and doing
Speaker 1: things like making sure you buy large capitalization stocks, add
Speaker 1: some defense by buying utilities and and consumer staples. Make
Speaker 1: sure you buy some value stocks. I'm not saying load up.
Speaker 1: I'm not saying reduce your allocation to equities. But I'm
Speaker 1: saying in two thousand twenties going to be a lot
Speaker 1: more difficult a year. You can see that very clearly
Speaker 1: than two thousand nineteen. So I'm saying, add a little
Speaker 1: defense to portfolios. Remember, this has been an extraordinarily long cycle,
Speaker 1: the longest ball market in history, the longest expansion in history.
Speaker 1: Common sense alone says, look at trees, don't grow to
Speaker 1: the sky. You might add a little defense to portfolios.
Speaker 1: Is it's not time to go into the bunkers. It's
Speaker 1: not not time to take too much risk off the table.
Speaker 1: But you have to watch very closely when when you're
Speaker 1: you're a record, When you've got these records staring you
Speaker 1: in the face. On the flip side, what would you
Speaker 1: have to see with respect to the spread of the
Speaker 1: coronavirus and the subsequence slow down on the Chinese and
Speaker 1: other related economies To change your view and become even
Speaker 1: more pessimistic. Yeah, that's a great question. I'm not sure
Speaker 1: what it would take, but I think it would probably
Speaker 1: be you have to watch the news, and it's gonna
Speaker 1: be it's not going to be something you can easily quantify,
Speaker 1: and the news that you really want to watch is
Speaker 1: what's going on to China. You know, the Chinese economy
Speaker 1: is going to slow this year six point one percent
Speaker 1: down to five point eight percent. If we've got numbers
Speaker 1: or forecasts, shall we say from sensible plate people, that
Speaker 1: looks like five and a half percent. Uh, then we're
Speaker 1: talking about the impact of this, uh, the coronavirus being
Speaker 1: a lot more significant than we had previously estimated our forecasts.
Speaker 1: And then we've got to reduce our forecast for the
Speaker 1: global economy or forecasts or not only China, our forecast
Speaker 1: for the US. Remember China's an important export desition, that
Speaker 1: destination for the U S. And and then we're gonna
Speaker 1: bring earnings estimates for the SMP down, and that's when
Speaker 1: that's when we're gonna have some real problems I think
Speaker 1: in the markets. I'm hoping that doesn't happen, but nevertheless,
Speaker 1: that's what you gotta watch. You gotta watch what's going
Speaker 1: to be the impact on China, an important export destination
Speaker 1: for the U S. You you mentioned earnings were maybe
Speaker 1: a third of the way through this earning season. Any
Speaker 1: takeaways for you so far. Yeah, it's a puzzling thing.
Speaker 1: And it's been puzzling for every earning season we've seen
Speaker 1: for the last four or five earning season. And that
Speaker 1: is companies are coming in with better than expected earnings
Speaker 1: that's not as good as we sail for the third
Speaker 1: quarter that we saw in the fourth quarter, were still
Speaker 1: have seventy percent of the companies of giving US earnings
Speaker 1: that are above expectations. But at the same time that
Speaker 1: we're getting that for the fourth quarter of two thousand
Speaker 1: and nineteen, earnings expectations are forecasts by myself and others
Speaker 1: for two thousand and twenty keep coming down. We worried
Speaker 1: about ten percent at the start of the fourth quarter.
Speaker 1: We're now down pretty close to eight percent eight point three.
Speaker 1: So estimates for two thousand twenty keep coming down. And
Speaker 1: and so I'm happy about what we saw for to
Speaker 1: to the fourth quarter. I'm not really happy about what
Speaker 1: I'm seeing lying ahead for two thousand and twenty, and
Speaker 1: that makes my concerns are worries about valuation even deeper.
Speaker 1: Hugh Johnson, thank you so much for being with us.
Speaker 1: Hugh Johnson, Chairman and Chief Investment Officer of Hugh Johnson Advisors,
Speaker 1: over say one and a half billion dollars from Albany,
Speaker 1: New York. Of course, what's driving the risk off field
Speaker 1: as the coronavirus which has been spreading and some of
Speaker 1: the measures that China has taken to prevent further spread.
Speaker 1: Joining us who has been weighing in all more day
Speaker 1: and all week last week, Drew Armstrong, team leader for
Speaker 1: you as healthcare Bloomberg. Drew, can you just bring us
Speaker 1: up to date? What is the latest in terms of
Speaker 1: the spread and the efforts to contain the virus at
Speaker 1: this point? Well, I mean, I think the biggest things
Speaker 1: we're watching right now are kind of looking out for
Speaker 1: new global cases. We do know CDC is going to
Speaker 1: brief reporters a little bit later this morning, and we
Speaker 1: may get some updates on exactly what the situation is
Speaker 1: in the U S where we have five confirmed cases
Speaker 1: but several dozen people who have been under observation or
Speaker 1: in isolation. You know, approaching three thousand cases in China.
Speaker 1: Accounts there continue to rise. I mean, we've seen several
Speaker 1: hundred more cases at it each day. And I think
Speaker 1: the biggest thing everybody is looking at is do things
Speaker 1: in China accelerate, um and continue to grow in a
Speaker 1: meaningful way. Meaning you've got kind of sustained ongoing transmission
Speaker 1: and a lot of the lockdowns that they've been doing
Speaker 1: there aren't working, which is a possibility. Um. And do
Speaker 1: we see kind of ongoing or sorry, do we see
Speaker 1: new transmission happening outside of China which would really put
Speaker 1: this in a new phase. So Drew, just give us
Speaker 1: some sense of context maybe relative to say the stars
Speaker 1: of virus that of many years of several years ago, um,
Speaker 1: where we in scope related to that? You know, I
Speaker 1: think there's a lot of similarities, and people do make
Speaker 1: that comparison. I mean, there's similar types of viruses. Both
Speaker 1: are coronaviruses. They appear to come from some kind of
Speaker 1: animal reservoir um in China, and both are respiratory illnesses
Speaker 1: that can be deadly in the wrong type of patient.
Speaker 1: You're looking at people who are maybe a little bit older,
Speaker 1: maybe a little bit sicker, Uh, those folks are in
Speaker 1: general more vulnerable to to any type of illness, whether
Speaker 1: it be the flu um or one of these more
Speaker 1: novel novel pathogens that we've been seeing. And so you know,
Speaker 1: you're seeing the same types of restrictions on trade, the
Speaker 1: same same types of economic worries that we're having here.
Speaker 1: Stars was a lot bigger than this was, but it's
Speaker 1: very early days. I mean, that was a long running epidemic.
Speaker 1: I think one of the things you've seen that is
Speaker 1: different from Stars is that public health authorities around the
Speaker 1: globe are increasingly sophisticated about how they respond as China
Speaker 1: in particulars increasingly sophisticated. China is a very different place
Speaker 1: in two thousand two, two thousand three from where it
Speaker 1: is now. Some of the same practices, um, you know,
Speaker 1: we were talking about these wet markets and things like that,
Speaker 1: or you know, it's coming from an animal reservoir, maybe
Speaker 1: in baths or something. Those are still the type of
Speaker 1: things you you worry about. The doocey is similar, but
Speaker 1: China is a really different country than you know, fifteen
Speaker 1: or twenty years ago. Yeah, although there are issues in
Speaker 1: terms of not having the right hospital beds, enough hospitals.
Speaker 1: They're building hospitals currently as we speak to try to
Speaker 1: meet the demand. Also just some basic supplies, the idea
Speaker 1: of gowns and protective equipment for the medical workers to
Speaker 1: take care of the patients. How is that kind of
Speaker 1: I guess illuminating issues within China that are going to
Speaker 1: make this harder to to sort of stave off, even
Speaker 1: with the quarantine that's currently in place. Yeah, anytime you
Speaker 1: have a widespread outbreak, one of the big things that
Speaker 1: you worry about is isolation and containment. This is something
Speaker 1: that public health or experts are going to talk. If
Speaker 1: you have people who are contagious, you don't want them
Speaker 1: around other people, And especially when you've got a virus
Speaker 1: that is this new and has some of these scary
Speaker 1: potential uh consequences to it, you need the hospital beds
Speaker 1: and you need isolation units. When you're dealing with thousands
Speaker 1: of new cases, No city around the globe is going
Speaker 1: to have the capacity to say, hey, we need to
Speaker 1: put three thousand people in isolation, and we need to
Speaker 1: do it tomorrow. So you've got to build. And that's
Speaker 1: why they're putting together a hospital to deal with this.
Speaker 1: They did the same thing with Stars during that outbreak.
Speaker 1: So some of this is saying we just need to
Speaker 1: get the facilities in place where we can do the
Speaker 1: basic fundamental public health medical work to get these cases
Speaker 1: out of the population and stop them from potentially transmitting.
Speaker 1: That is going to be made tricky by this thing
Speaker 1: because it has a long incubation period. We don't know
Speaker 1: are people with really mild symptoms spreading it around without
Speaker 1: necessarily knowing they get sick. There's some complicating factors here
Speaker 1: that I think the experts dealing with that are really
Speaker 1: still trying to get their hands on it real quickly.
Speaker 1: How did the Stars issue kind of take care of
Speaker 1: itself or how did that play out? Every almost every
Speaker 1: single outbreak like this, it comes down to good public
Speaker 1: health practices. I mean, you get like a vaccine that
Speaker 1: came out for Stars. Vaccines tend to take you know
Speaker 1: when when when you talk about drugs you need months
Speaker 1: or years. Often they get developed well after an outbreak
Speaker 1: has ended. You know, we have a we have a
Speaker 1: bowl of vaccine now, but we also started developing it
Speaker 1: um in the beginning of the first outbreak in the
Speaker 1: two thousand tents, and we only just now have it Okay,
Speaker 1: Drew Armstrong, thanks so much for that update. We'll look
Speaker 1: for the CDC briefing the reporters eleven thirty Wall Street Time,
Speaker 1: Drew Armstrong, team leader for US Healthcare busy reporter as
Speaker 1: the Healthcare team is as a track this coronavirus. Drew Armstrong,
Speaker 1: Bloomberg News. Joinings here on a Bloomberg Interactive broker studio.
Speaker 1: But we often hear the phrase think outside the box.
Speaker 1: But how about thinking outside the building. That's what our
Speaker 1: next guest suggests that we do. Roosevelt Moss Cantor. She's
Speaker 1: the R. Bacal Professor of Business Administration at the Harvard
Speaker 1: Business School, also Chair and director of Harvard's Advanced Leadership Initiative.
Speaker 1: She joins us here on our bloom Interactive broker studios.
Speaker 1: But thanks so much for joining us. We appreciate you
Speaker 1: coming here. Talk to us about your book, Think Outside
Speaker 1: the Building. How advanced leaders can change the world one
Speaker 1: smart innovation at a time. That's the title of your book.
Speaker 1: What do you what's the key takeaway there? So, if
Speaker 1: you want innovation, you can't stay stuck within today's structures,
Speaker 1: today's assumptions, today's thinking. And if you think about it.
Speaker 1: I mean, here we are, we're in a highly digital
Speaker 1: radio program. Um how I mean the news is no
Speaker 1: longer the newspaper. Education isn't the school of the classroom.
Speaker 1: Health is not the hospital. It's a lot of stuff
Speaker 1: that goes on outside and around it. And we're fixing
Speaker 1: health by fixing nutrition for example. UM. So, if you're
Speaker 1: constrained by your job, the particular company you work for,
Speaker 1: if you're constrained by conventional thinking, you never can do
Speaker 1: anything novel or innovative. So have to get out. Can
Speaker 1: you give us an example of somebody who did this
Speaker 1: and took a risk and became incredibly successful in in
Speaker 1: their sort of innovations. Well, in many ways, many most
Speaker 1: entrepreneurs do some of that. I mean they see that
Speaker 1: there's something totally different possible because they see the gaps
Speaker 1: they um so Uber, even though it had a very
Speaker 1: checkered history in the beginning in terms of of regulators
Speaker 1: and lots of other things. I mean, that was seeing
Speaker 1: that the conventional taxi industry was not meeting all the
Speaker 1: needs of people. You you're out there watching on the streets,
Speaker 1: it's not hard to see. But if you're stuck within um,
Speaker 1: an existing corporation, you might not see that. And in
Speaker 1: my book, I tell the example the former president of
Speaker 1: Trader Joe's who has an entirely new retail concept now
Speaker 1: to feed people in food deserts and inner cities by
Speaker 1: um using food that would otherwise be wasted. And that
Speaker 1: wasn't his first idea. Took him a long time to
Speaker 1: get out of thinking traditional grocery store UM supply chains,
Speaker 1: and now he has something that's doing very well in
Speaker 1: Boston and is going to spread around the country. I'm
Speaker 1: struck by the timing of your book. It comes at
Speaker 1: a time of incredible money going into venture capital funds,
Speaker 1: incredible amounts of money going into Silicon Valley, in particular,
Speaker 1: with unicorns being created with their valuations above a billion
Speaker 1: dollars regularly. I'm wondering, when companies get big quick, does
Speaker 1: that stifle innovation because people have to stay within the
Speaker 1: building and keep it going and try to generate profits
Speaker 1: rather than foresee the next sort of disruptive trend to
Speaker 1: innovate around it. Certainly makes it easier for people to
Speaker 1: get stuck. If you're growing fast with one formula, and
Speaker 1: if you depart from it, you might undercut that formula.
Speaker 1: But then look at Amazon, which started out with books
Speaker 1: and has managed to expand to practically everything else, including
Speaker 1: selling its own computer system. That's amazing that Amazon Web
Speaker 1: Services is the biggest deal going on the cloud. What
Speaker 1: does that have to do with selling books online? How
Speaker 1: about some more traditional industries, whether it's automni automobiles, are
Speaker 1: just manufacturing or you know kind of how are some
Speaker 1: of those companies doing as it relates to innovation. Well, so,
Speaker 1: first of all, I had there was a very interesting
Speaker 1: comment at a conference UM that I had pulled together
Speaker 1: a few years ago and had invited Mary Barra from
Speaker 1: General Motors to talk, and we were talking about the
Speaker 1: future of transportation and she said, you know, when she
Speaker 1: was starting out in marketing that UM, the cell phone
Speaker 1: was first called the car phone because that was the
Speaker 1: only place people had carverone. She said, boy, did they
Speaker 1: miss a bet. And now the car itself is a computer.
Speaker 1: The metal is the least value added part of the car.
Speaker 1: And that's interesting. We don't even know yet how all
Speaker 1: of that's going to play out, and how that car
Speaker 1: is going to talk to other cars, to the billboards,
Speaker 1: to the streets. Amazon, I want to go back to
Speaker 1: what you were saying, this idea that they've managed to
Speaker 1: innovate repeatedly to dominate a whole host of different industries.
Speaker 1: How does a company create a culture of innovation? I
Speaker 1: think in the Amazon case, there are two different kinds
Speaker 1: of cultures of innovation. One is you have a founder
Speaker 1: that wants to dominate the world. And there was a
Speaker 1: time in Silicon Value where they all said total world domination.
Speaker 1: Jeff Bezos said Amazon meant it because he was he
Speaker 1: was always envisioning things bigger um. And so partly the
Speaker 1: culture of innovation comes from a founder who has a
Speaker 1: big dream and is not going to let go of
Speaker 1: that big dream for the trivia of operations and turn
Speaker 1: operations over to other people. Ellen Musk is much the
Speaker 1: same way. UM. So there's another kind of culture of innovation,
Speaker 1: and I talked more about that in my book, which
Speaker 1: is a bottom's up culture of innovation, where you give
Speaker 1: people the sense of importance, the freedom to actually leave
Speaker 1: the building and come back with ideas. I mean, I
Speaker 1: have an example of a law firm where there was
Speaker 1: a young man in the law firm who got the
Speaker 1: law firm to take seats in a tech incubator a
Speaker 1: law firm, and they weren't there to sell legal services.
Speaker 1: They were there to soak up a culture of innovation,
Speaker 1: and that law firm is one of the first with
Speaker 1: digital wills and other ways to use technology on routine services.
Speaker 1: So I think that if you empower the workforce and
Speaker 1: also again get them outside of the conventional, there's only
Speaker 1: one answer, Rosabeth, what's the role of government in terms
Speaker 1: of fostering innovation? You could say Silicon Valley, the U. S.
Speaker 1: Tech business has been so successful because the government has
Speaker 1: taken a very light hand to regulation. That was after
Speaker 1: they were successful. I mean, you know, they like to
Speaker 1: say government had nothing to do with it, They shouldn't
Speaker 1: have anything to do with it. Go away, And that
Speaker 1: was the uberstance for a long time that got them
Speaker 1: banned in many countries around the world. But in fact
Speaker 1: government has a big role because Silicon Valley was the
Speaker 1: result of the defense industry and defense spending, and so
Speaker 1: was um Boston's High Tech Corridor in Austin, Texas. Defense.
Speaker 1: That's government. Then there is healthcare, which has so much
Speaker 1: government spending. Boston is now the one the healthcare life
Speaker 1: science as capital of the world. A lot of that
Speaker 1: was federal brands, So we don't write off government. It's
Speaker 1: the regulation later I think we might worry about, But
Speaker 1: initially government is a great seed fund. Professor, thank you
Speaker 1: so much, really really interesting insights and terrific book. Think
Speaker 1: Outside the Building, How Advanced leaders Can change the world,
Speaker 1: one smart innovation at a time. Professor Roosabet Moss Cantor
Speaker 1: of Harvard, the Artbical Professor of Business Administration at Harvard
Speaker 1: Business School and also the Chair and director of Harvard's
Speaker 1: Advanced Leadership Initiative. Joining us here in our interactive Broker
Speaker 1: studio is a really important discussion at a time of
Speaker 1: unprecedented amount of money going into venture capital, and a
Speaker 1: question about how to sort of get to the next
Speaker 1: level when it comes to tech advancement, when it comes
Speaker 1: to countering UH climate change, a whole host of other things.
Speaker 1: How do you set the stage to even understand what
Speaker 1: might be the needed things going forward. Paul, we've talked
Speaker 1: a lot about the Everything rally and how that just
Speaker 1: has been a melt up. Well, there hasn't been a
Speaker 1: melt up when it comes to the shares of Wells,
Speaker 1: Fargo and Boeing Boeing in particular, absolutely slammed the past
Speaker 1: twelve months, shares down more than ten percent, kind of shocking.
Speaker 1: It's not more. Wells Fargo shares a completely little twelve
Speaker 1: month trailing period at two point four percent of a
Speaker 1: decline including dividends. And the question that's emerging is how
Speaker 1: much is this a failure of corporate governance and what
Speaker 1: does that say going forward about what will it take
Speaker 1: to change both some of the issues and these companies
Speaker 1: as well as others that might be facing similar issues.
Speaker 1: Richard Chambers joining us now President chief executive Officer of
Speaker 1: the Institute for Internal Auditors the I I A uh,
Speaker 1: and really I want to give a sense how much
Speaker 1: was a failure and corporate governance the main driver behind
Speaker 1: both of the scandals that we saw at Boeing and
Speaker 1: Wells Fargo. Well, first of all, thank you for having me,
Speaker 1: and it's great to be back. Uh. You know, corporate
Speaker 1: governance is is an ongoing challenge we have. The i A,
Speaker 1: the Insued Internal Auditors has been surveying around this and
Speaker 1: doing a good bit of analysis over the last few months.
Speaker 1: And the issues that we see oath that Wells Fargo
Speaker 1: and it Boeing are not surprising given the kind of
Speaker 1: results that our analysis has has disclosed. In fact, the
Speaker 1: eight guiding principles of corporate governance that we have identified
Speaker 1: jointly with our with our partner at the Neil Center
Speaker 1: of Corporate Governance at Tennessee University of Tennessee. Those eight
Speaker 1: guiding principles we surveyed around those and and corporate governance
Speaker 1: overall came out in this country at a at a
Speaker 1: barely a passing grade at a C plus um. We
Speaker 1: think there is so much yet to be done. But
Speaker 1: when you start to look at these two companies in particular,
Speaker 1: there there's certainly are a lot of questions about culture
Speaker 1: in the companies, and yet boards have on an overly
Speaker 1: optimistic assessment of the culture and their organizations. Another survey
Speaker 1: we did said that boards think that the company is
Speaker 1: better managing that risk culture than any other risk. So
Speaker 1: boards are often uh surprised when these things happened because
Speaker 1: they just haven't been focused on them. It's interesting at
Speaker 1: Davos last week we were Bloomberg News was reporting a
Speaker 1: lot of discussion and commentary around sustainability governance, some of
Speaker 1: these issues taking you know, more Center stage. We even
Speaker 1: had the Business Roundtable talk a little bit. I guess
Speaker 1: the announced last year the companies should focus more on
Speaker 1: sustainability than stock price, and as an old Wall Street guy,
Speaker 1: it just sounded silly to me. I mean, where do
Speaker 1: you think corporate America is in terms of balancing you know,
Speaker 1: shareholder returns, which have always been kind of the responsibility
Speaker 1: of boards and management to maybe some of the you know,
Speaker 1: e s G type metrics as well. Well. I can
Speaker 1: tell you that our study that we did, the American
Speaker 1: and Corporate Governance Index study that are referred to a
Speaker 1: minute ago, sustainability was the lowest grade of all areas
Speaker 1: as far as board oversight, UH mirror mirror C as
Speaker 1: an overall grade. UM. I think boards are are maybe
Speaker 1: appropriately reacting to shareholder expectation. Shareholders are anxious to see
Speaker 1: immediate returns. There's some you know, instant gratification if you're
Speaker 1: trading in the market by a lot of people, and
Speaker 1: so boards try to be responsive to that. But I
Speaker 1: think they fail their shareholders by not doing anything long
Speaker 1: term about taking any kind of view and sustainability. The
Speaker 1: implication in your results that basically there were some serious
Speaker 1: problems with corporate governance both at Boeing and Wells Fargo
Speaker 1: that should have left some of the issues as not
Speaker 1: a huge surprise. Leads to another question, which is are
Speaker 1: we going to see more surprises like this? Based on
Speaker 1: the fact that on average, companies in the US are
Speaker 1: barely a passing grade and there probably are others that
Speaker 1: have severe failures and corporate governance out there, I think
Speaker 1: it's inevitable. I think it's inevitable unless unless boards began
Speaker 1: to anticipate risks that aren't clearly on the radar, risks
Speaker 1: like culture. Unless they begin to anticipate it, I think
Speaker 1: we're in for a lot more than okay. So give
Speaker 1: us a specific example of something that a corporate board
Speaker 1: should be doing that you often see a failure to
Speaker 1: do well. I think the corporate board at a minimum
Speaker 1: should be looking and having conversations with more than just
Speaker 1: the CEO and the C suite. Corporate boards should be
Speaker 1: talking to the head of internal audit, the head of
Speaker 1: HRU too, corporate compliance executives to get a sense of
Speaker 1: what lies beneath the surface. Because what we often see
Speaker 1: is when these culture debacles explode, is the boards are
Speaker 1: are completely amazed they're surprised because in many cases they
Speaker 1: either hired the CEO or the CEO got them appointed,
Speaker 1: and so there's this natural level of trust there and
Speaker 1: they just can't anticipate or don't don't foresee the kind
Speaker 1: of problems that the company finally gets itself into. Well
Speaker 1: maybe you know it's interesting. Black Rock recently said that
Speaker 1: sustainabilities can become a much bigger part of their investment process. Um,
Speaker 1: do you think that might kick start some boards to say, hey,
Speaker 1: if I want to support of a black Rock or
Speaker 1: some of these other big investors, I gotta take this
Speaker 1: thing more seriously. I think it's a good, good indication
Speaker 1: of maybe a trend that will emerge. Black Rock I think,
Speaker 1: if I'm not mistaken, said uh that even where they
Speaker 1: have indexed funds, they intend to get more activists or
Speaker 1: more active in uh in voting their shares around these
Speaker 1: issues of sustainability and and kind of the strength and
Speaker 1: effectiveness of corporate governance. So I do think it's a
Speaker 1: good start, but I think we have a ways to go.
Speaker 1: There's sort of a popular belief that during times of
Speaker 1: froth or rallies, and I don't know if you will
Speaker 1: define this is a time of froth. But certainly there's
Speaker 1: been a very long standing rally that shareholders overlook problems
Speaker 1: more easily because they just want the gains. Do you
Speaker 1: feel like corporate governance has deteriorated and that just in
Speaker 1: general internal auditing standards have to perated as shareholder has
Speaker 1: become more forgiving in light of the gains that we've seen.
Speaker 1: I do think that when everything is going well, there's
Speaker 1: a tendency not to look below the surface. You see
Speaker 1: the water is calm, but you may not see the
Speaker 1: currents underneath um. And unfortunately a lot of these things
Speaker 1: tend to build up over time. I think I saw
Speaker 1: where somebody observed recently. It was Hemingway who said, um,
Speaker 1: everything is calm until it isn't um. And no, I
Speaker 1: think it was everything is is subtle until it becomes
Speaker 1: very jumps out absolutely right. So just real quickly, external
Speaker 1: auditors what how much responsibility should they bear for some
Speaker 1: of these issues? Well, the external auditors have a have
Speaker 1: a tough job to do. I think they're doing probably
Speaker 1: a lot better job than they were twenty years ago.
Speaker 1: In the wake of uh in Ron world calm and
Speaker 1: all the accounting reforms I think they're doing a better job. Again,
Speaker 1: if you look, many of the of the big corporate
Speaker 1: scandals we're talking about, even the ones you referred to
Speaker 1: earlier today, weren't financial reporting frauds. They're not uh, misstatements
Speaker 1: that the external auditors overlooked and until external auditing regulations
Speaker 1: or standards require them to look beneath the surface at
Speaker 1: things like culture, at what kind of compliance culture, for example,
Speaker 1: a company has. Until those are required, I don't think
Speaker 1: that they're going to be the ones who identify these things.
Speaker 1: These are the things that the internal uditors can find.
Speaker 1: Richard Chambers, thanks so much for joining us. Richard Chambers,
Speaker 1: President and chief executive Officer of the Institute of Internal Auditors,
Speaker 1: based down in Altamont Springs, Florida. Thanks for listening to
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
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Speaker 1: you prefer. Paul Sweeney I'm on Twitter at pt Sweeney
Speaker 1: and Lisa Abram Woyd's I'm on Twitter at Lisa Abram
Speaker 1: Woyds One. Before the podcast, you can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio